Actionable Ideas for Companies and Sponsors

Minority Investments in both Public and Private Companies

Uncertainty is the enemy of a robust M&A market, and 2022 has presented many challenges, particularly in recent months. The confluence of high inflation, rising interest rates, recession fears, and geopolitical turmoil have challenged leveraged finance and equity markets, and conspired to reduce M&A activity substantially. Global M&A fee pools are down over 40% in the last three months (June through August) versus 2021 and private equity exits are similarly challenged, with completed transactions down nearly 60% versus 2021 during the same period.

Nonetheless, we believe the recent trend of both private equity and corporations taking substantial minority positions in both public and private companies will gain traction as they seek to invest capital against this challenging backdrop. Recent examples include:

  • State Farm and Google’s recently announced independent investments into ADT, a public company with substantial ownership by Apollo Global: State Farm will invest $1.2 billion for a 15% interest in ADT. The investment was struck at a 25% premium to ADT’s share price and ADT will use proceeds to repurchase shares in the open market at the same per share price. State Farm also earmarked $300 million in funding to pursue product innovation and marketing initiatives across the two platforms. Google, already a 6% shareholder in ADT, agreed to invest a further $150 million focused on connected home initiatives, likely leveraging its Nest brand products.
  • Vizient’s strategic minority investment into Kaufman Hall, owned by Madison Dearborn Partners (“MDP”): MDP identified key areas of collaboration to include enterprise and service-line growth initiatives, strategic partnerships, spend management and clinical quality, amongst others. The investment in Kaufman Hall took the form of secondary capital with MDP retaining a majority position.
  • In the private equity universe, several straight equity investments were made for minority positions, including: Caisse de depot et Placement du Quebec investing in ICR (strategic communications and advisory), which was owned by Investcorp; Brentwood Associates investing in Pacifica Beauty (vegan beauty products), owned by the founders and growth investor Alliance Consumer Growth; and Carlyle taking a minority position in Duravant (engineered equipment and automation solutions provider), which was previously owned by Warburg Pincus. In each of these cases, existing investors retained meaningful or control positions signifying their ongoing confidence in the businesses.

These types of investments have several benefits relative to overall acquisitions: (i) they do not require leverage, (ii) existing owners continue to enjoy the benefits of upside appreciation at a time when new investments are hard to find, (iii) they do not trigger change of control provisions in the existing capitalization, (iv) they can couple primary and secondary proceeds potentially adding fresh capital for investment, and (v) in the case of strategic investment by another corporation, they bring synergistic benefits to both parties. Corporations making these investments can utilize cash on hand or low-cost debt to fund these transactions in a less competitive deal-making environment.